We believe there is no reason to keep your startup's fundraise in a zero-interest bank account. If you're a typical Seed-stage startup that has raised some money, you'll earn tens of thousands of extra dollars, simply by storing your money in a high-yield account. For a typical Series A/B startup, this will likely reach into the hundreds of thousands. This goes a long way towards reducing burn and preserving your runway. We've spent several months storing our own fundraise in various bank and cash management accounts, and we've finally settled down into Brex Cash, which we believe is the best option for most startups to store their money.
Note: this is a nascent space, and we anticipate that landscape of options will change quickly (as will Treasury yield rates). We'll be keeping a close eye on new developments, and will update this guide as soon as we have new info.
If you don't yet have a bank account, this guide is for you. If you do have a bank account, this guide is also for you. The neat thing is that every service we discuss is either a bank account or functions well as one. Moreover, regardless of whether you have an existing bank account, the services we'll talk about can turn your idle cash into an extra few thousand/tens of thousands/hundreds of thousands of extra dollars, risk-freeIt's possible to be a bit pedantic about the term risk-free, so we'll guide you to the Investopedia page on Risk-Free Assets, which does a great job at delving deeper into the term..
At the time of writing, the daily treasury yield rate for maturities under 1 year is approximately 1.55%, give or take some daily fluctuationsThe most up to date rates can be found at the Treasury's website. Terminology aside, what this effectively means is that 1.55% is an approximate upper limit for a risk-free yield on your otherwise-idle cashThis 1.55% number is approximately correct, but we'll dive into the caveats behind this number in a subsequent section.. If your money is in the right place, you should be able to realize this ≈1.55% return over the course a year. This guide is meant to help you figure out where this "right place" is.
This 1.55% yield rate is large enough that we believe it's quite important, because seed round sizes have dramatically increased over the past few years, far faster than the typical burn associated with those companiesThis is a phenomenon that's been holding quite true throughout recent YC batches.. Moreover, yield rates have shot up over the past few years, although they have been starting to shift back down since March-ish 2019.
In concrete examples: if you've raised a small $500k seed round, you'll be able to pay for food for your founders for a year ($7k). For a larger $2 million round, you'll be able to pay for your company's benefits or perks (or your founders' rent in SF; $28k). With $10 million you get a free engineer ($140k). Provided that switching overhead isn't too high, and the security of your money is near-guaranteed, we believe this is quite compelling from a pragmatic standpoint.
We've been users of every single service that'll appear in this guide. We've stored and moved a few million dollars to and from each of our accounts, and we understand which traits have made our lives dramatically easier, which have made our lives dramatically harder, and given us an appreciation of the benefits of cash management accounts. We're well-versed in the complex rules and regulations governing this field.
This said, here is a strong disclaimer:
This guide must be used for information purposes only. All opinions that we express are from the personal experience and research of our staff, and are intended as educational material only. Please independently research and verify any information that you find in this guide. We have done our best to make sure that this guide is accurate and up-to-date. Regardless, any information in this guide is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.
The 1.55% rate of return is oversimplified, and we'll use this section to explain the numbers behind this number
First off, cash management accounts need to make money themselves, and take a management fee that typically hovers around 0.25%. Note that this is a percentage of the total amount of money in your account (i.e. your net return is 1.55% minus 0.25%).
Management fees are counteracted by the fact that most of the cash management accounts we'll discuss invest in government money market securities, which have slightly higher yield rates than treasury bills alone. Government money market securities are a combination of treasury bills and repurchase agreements fully collateralized by cash or government securities. They are exceedingly safe due to the creditworthiness of the US government and short maturity (i.e., high liquidity), such that the SIPC even has to explicitly state that they are different from cash-in-handhttps://www.sipc.org/for-investors/what-sipc-protects.
However, to be very explicit, there is no guarantee that your money will be preserved, though you can be quite confident that this is one of the safest places your money can be. For example, for treasury bills to cause you to actually lose your money, you'll need the US government to default on its debt, in which case you'll likely have much larger issues to worry about. Again, please refer to the Investopedia page on Risk-Free AssetsYou could actually argue that government securities are a safer place to keep your money in than a bank account, because the latter has the risk of bank runs and the like..
One thing to note is that both the yield from a cash management account and the interest from a high-yield savings account are taxableInterestingly enough, there's a decent chance you didn't know this, because you're only taxed for interest earned above $10 in a tax year, which almost never happens given the paltry interest rates for most business bank accounts. However, given that this guide is targeted towards startups, which are more likely than not going to be reinvesting these gains back into the startup (and also likely to be running in the red to begin with), you should have no tax liabilityFor those that are profitable — a big congratulations to you. This isn't sarcasm and it feels a bit weird to even have to say that.. That said, there are edge-case situations in which this may not be true (e.g. if the yield tips your company from unprofitable to profitable), so you should try to get a stamp of approval from a financial advisor.
One final consideration is your runway. Your rate of return will be lower if you spend all of your money before.
Ultimately, an optimal store of money will accomplish three things: be safe, make you some extra money, and get out of your way. In the past, we have used every product in this guide as a business customer, and we know what to look out for. There are five main things to focus on: yield rate, onboarding, risk (or the lack thereof), compatibility & integrations, and fees & other limitations.
Yield rate is the reason why we wrote this guide in the first place. Given that your business cash would otherwise be sitting idle in a business bank account with an interest rate around a few basis points (if at all), we looked for the highest yield rate on a risk-free account. The best risk-free accounts will have yields that are approximately in line with the daily treasury yield rate, though we were willing to compromise on some basis points if the service had significant value-add on another axis. Sometimes, there are limitations that make the effective yield rate lower than the advertised values. We will point these out as we see them.
Onboarding is important for the opportunity cost, specifically around switching. This is less important (relatively speaking) if you are opening up your company's first account, because you are forced to go through the onboarding process to begin with. However, this guide is also meant to be highly applicable for companies that want to move their otherwise idle cash into a high-yield account, which is the situation we faced a month ago (at the time of writing, October 2019). For those situations, there is a non-negligible switching cost, in which case speedy onboarding becomes more important. This goes beyond the time cost of actually onboarding — if you put off setting up an account for a few months because you have to jump through a lot of hoops, you're losing out on a lot of potential yieldThis is exactly what happened to us when we tried to setup an account with Fidelity..
Risk is commensurate with potential upside. That said, we will only recommend risk-free stores of money. The money you receive is meant to help your startup succeed, not for speculative investments. Risk-free accounts are savings account from a bank or a cash management account that invests in government-backed money market funds. Some money management accounts have the option to invest the money into higher-yield funds that carry non-negligible risk. These include non-government money market funds and even riskier mutual funds. Even though this is an option, we do not recommend thisAnother way of thinking about speculation, illustrated through a more extreme example: you could use your company's idle cash to buy a house in SF and try to sell it off for a premium when you need liquidity. But that should seem quite wrong to you., and we'll point these out when they appear.
Compatibility & Integrations are important, because they enable cash management accounts to be used as a replacement for bank accounts. Historically, one of the reasons why cash management accounts were less popular was because they had terrible compatibility and could not be used in complete lieu of a bank account. For example, historically it was difficult to link payroll to a cash management account, and therefore a company would still needed a bank account to perform routine tasks. This meant that you still needed a checking account with a decent amount of working capital on top of a cash management account, which was a headache and carried overhead due to having to routinely transfer money between the accountsIf you maintained too high of a balance in your checking account, then you lose out on the benefits of a high-yield account. Too little, and you might accidentally miss payroll.. However, there are a new group of startups popping up that provide these integrations directly through a cash management account, enabling the account to function, for all intents and purposes, as a bona fide bank account. There are also secondary integrations with bookkeeping and accounting software, though those are typically standard across most banks and bank alternatives.
Fees & Other Limitations may sometimes show up in various forms, and are things to keep an eye out for, as they can start taking your focus away from a more important thing: running your business. These include fees on wires, monthly fees, and minimum balances, among a few others. The worse-case is when these restrictions start crawling into your mind before you conduct a transaction; having to double-check your every move when dealing with routine banking tasks is one way to quickly distract yourself for the better part of an hour.
Brex Cash was one of the best places to store your money according to every criterion we used, and the one that we ultimately chose to transfer our own money into. First, it has the best risk-free yield of any service that we tested, at 1.4%as of November 28, 2019, and unlike its competition, doesn't have any limitations that make the effective yield lower. Importantly, Brex Cash is also rather unique in that it has no limitations and fees, which made it feel like a pure store of money. In this way, it did the best job by far of getting out of our way when we needed to get things done. The user experience was great, but that was a constant trend across the newer startup-for-startup banking alternatives. Brex Cash also has close integration with their popular Brex Card, but we found that this doesn't make-or-break the experience. However, this isn't to say that Brex Cash is perfect. As we used it, we noticed that there were a few standard bank account features that were missing, notably checkbooks (and related: bill pay). To us, this was surprisingly remedied by the ability to send fee-less wires, but it may be important for your use case. We'll expound on potential drawbacks later in this guide.
Brex Cash had the highest effective yield rate of 1.4%, which is one of the highest that we've tested. This is around the highest rate that you can achieve in a risk-free fashion, net of management fees. The investment is through the Dreyfus Government Money Market fund (DGCXX), whose SEC prospectus you can read here. Dreyfus is part of BNY Mellon, and is a reputable manager. Moreover, this is a government money market fund, which is the safest type of fund and considered to be a risk-free asset.
This is something that is known as a sweep account, where your idle money is "swept" into a higher-interest money market fund. Importantly, these sweep accounts are usually much better for the account holder than the company offering it from an opportunity cost standpoint. For example — banks have significantly higher margins when they use your money to power their lending services (e.g. mortgages, loans, etc.) which have the added benefit of having a relatively opaque return. With a cash sweep service, the total yield is capped by the treasury rate and their margin becomes the management fee (which is usually a comparatively low number around 0.25%). This is why banks try to avoid giving you the option to sweep your cash into a money market fund, and even if they do, try to make it as difficult as possible for you to actually participate. This is one of the main reasons why we think that Brex Cash is one of the most user-friendly stores of money from a purely financial perspective.
Your business' money is insured up to a limit of $500K through SIPC, which is double the amount that the FDIC would insure for your business' bank account. Brex Treasury LLC, which runs Brex Cash, is a member of FINRA and the SIPC, and is a registered broker-dealer. It is eligible for SIPC insurance because it sweeps your money into a government money market fund, rather than keeping it idleRobinhood has previously gotten in some trouble for not following these rules (apparently they didn't even call the SIPC before announcing their product). On the other hand, according to a conversation with a Brex Cash PM, we understand Brex has worked closely with the SIPC to ensure that Brex Cash remains compliant..
Your account will have routing and account numbers which can be used to direct transfers and receive money. With support for ACH and wires, Brex Cash has the complete feature set of a basic bank account. In terms of inbound, every direct deposit that we've attempted (mostly from Stripe deposits and invoices) has gone smoothly. For outbound transfers, we've also successfully replaced our preexisting bank account with Brex Cash in our payroll software (Gusto), and apart from Gusto correcting our inputted routing number, this transition has gone off without a hitch. In our experience, Brex Cash has worked seamlessly when used in lieu of a bank account for services that normally require one (e.g. payments, payroll, etc.).
Brex Cash also has a refreshing lack of limitations and fees, which makes it easy for you to do things without having to double-think everything. First off, it comprises a single account, and doesn't carry the checking and savings delineation that traditional bank accounts have. This means that you are able to earn interest on every single dollar you have on that account, rather than only earning interest on the money in your savings account. This is important because savings accounts have federally-mandated limitations to the number of transfers/withdrawals a month, meaning that a substantial portion of your total cash-in-bank will have to remain in your checking account as working capital. Sometimes, savings accounts will also explicitly require a minimum balance in your checking account.
Secondly, the absence of fees on typical transactions (namely wires and ACH) are great, but we don't think that this is a make-or-break feature for Brex CashThat is despite the prominence of "No fees" on billboards that you might be seeing if you're in the Bay Area. We believe that the high yield and ease-of-use are the biggest differentiating factors (although harder to communicate).. It's rather rare to use wires outside of during fundraising, and ACH has low to no transaction fees to begin with. We surveyed a few YC companies and found that in general, from a purely monetary standpoint, your total savings as a startup will range from around $25 to $250 a year, commensurate primarily with fundraising activity. If your company is bootstrapped or raises occasionally from a few investors, then your savings will be closer towards the lower bound. If you're raising frequently and/or with large party rounds, then your savings can easily climb to over $250. However, at a high level, we don't think this is that important from a financial standpoint. That said, we do think that this is important because Brex this follows the trend of exceptional user-friendliness, as it doesn't require you to worry about any of the technical details in making the transaction, and just allows you to do it.
This is something that we think is worth talking about more. Brex Cash has a stand-out user experience simple because it's non-antagonistic. Every other bank or money management account we've used will try to de-risk themselves as much as possible, which results in the onerous procedures you need to go through when setting up an account, transferring money, paying bills, etc. On the other hand, Brex Cash has an intrinsic policy to accept some of this risk themselves to greatly streamline various parts of the user experience.
This manifests itself in a few ways. First off, the aforementioned lack of fees. Wires actually do cost your bank money to process, and they almost always pass the cost onto youACH also usually doesn't cost anything, but sometimes banks will still charge you a few dollars for ACH transfers. Brex Cash, on the other hand, eats these costs for the sake of customer service. The same goes for transfers between existing bank accounts that are linked through Brex, and your Brex Cash account. Normally banks will enforce a lockup period of a few days for interbank transfers, but Brex has enough trust in youOr good enough risk management, if you want to take that perspective that it'll credit your account before any money arrives.
Brex Cash's primary shortcoming is that it is difficult to be approved for an account. Currently, there is a waiting list for an account, and we've been told that existing Brex Card members are being prioritized. From surveying other Brex Cash account holders, getting off the waiting list can take anywhere from a day to a few weeks, with some factors, such as being a YC company, potentially expediting that process. If you want to stay outside of the Brex Card ecosystem, then Brex Cash will probably not be an option for the near future. When this changes, we'll update this guide.
One thing to keep an eye out for is the yield rateWhether this is a potential downside or a potential upside depends on the recent historical numbers for treasury rates.. This is a factor that cannot be influenced by Brex Cash, but still affects its primary value proposition. This is a potential downside because the yield rate for treasury bills has decreased over the past few months, with this trend having started around March of 2019. While we are not prescient, we don't. Despite changes in treasury rates, Brex Cash still has had the highest yield rate of any of the bank and cash management accounts we've seen, and given the transparency behind the actual return (e.g. we have the detailed investment strategy and the raw management fee numbers) we're still confident that even if the yield rate decreases, Brex Cash should maintain the highest rate among the competition. Our general stance is that even if the decreasing yield rate trend accelerates, Brex Cash would still be our recommendation for the foreseeable future. However, we will be watching developments for you, and will update this article if anything significant comes about.
There are a few standard bank functions that are missing from Brex Cash. Most notable is the absence of checks. That said, we did find that the lack of wire fees made wiring money a viable alternative to writing checks. For us, we had previously paid our office rent using checks to avoid incurring wire fees. Now that there are no wire fees, we've replaced our check usage with direct wires, and it's been a much better experience for all parties involved. Do note that depending on the recipient's bank, they may still pay incoming wire feesDepending on how stringent they are, your recipient may require you to pay the wire fees, which does negate this benefit somewhat..
For the companies that need to write physical checks, such as for rent or otherwise, then you'll need a full-service bank account. For companies that are looking to switch from a bank account to Brex Cash, this could very well be your original account. There is also no support for bank-specific services such as Zelle (i.e. the business-oriented Venmo), as well as no support for recurring payments (some banks will call this Bill Pay). After reaching out to Brex Cash, we were told that these are on the roadmap, but with no launch day planned as of yet.
Mercury.co is a full-service bank account geared towards startups. At its core, it is a bona-fide bank account that has the best user experience of any bank, but still carries some of the limitations inherent to bank accounts. For businesses that require the full-fledged functionality of a bank account (read: debit cards, check writing/deposits, ATM withdrawals, etc.), want to avoid the Brex ecosystem, or need an account ASAP, then Mercury.co is our recommended choice, although the tradeoff is somewhat lower yield and a few extra limitations.
Here's the low-down: Mercury.co is bank with the ease-of-use of a startup and the trust and administration of an established bank. This is true because this is how the company operates. Mercury.co has a partnership with BBVA and Evolve Bank & Trust, which are both mid-sized FDIC-insured banks with good reputations. Your money is deposited at these banks rather than held with Mercury.co itself. Note 1: this is quite a common arrangement for banking startups. Note 2: in spite of your money potentially being held at both of these two banks, your total deposits still only qualifies for the normal FDIC limit of $250,000Normally, if you have two independent accounts at two banks, the FDIC limit applies independently..
This setup enables the Mercury.co team to focus on making substantial improvements to your user-experience around their bank account, and that's where the product shines. The user experience makes the process of executing transfers significantly easier than any comparable bank account. For users accustomed to the ease-of-use of many recent software products, Mercury.co will come as a big relief compared to your old-school bank. All of your standard bank functionality, ranging from ACH transfers, wires, check sending, deposits, and more, has been streamlined into two choices: "Add Funds" and "Send Funds." Deposits to your account, whether interbank transfers or via checks, are dealt with by the former. "Send Funds" allows you to send money through ACH, wires, and physical checks. It's transparent and straightforward — there's no more searching around your bank dashboard for the functionality you need. In this manner, Mercury.co does one of the best jobs of getting out of your way when you need to execute a transaction. Mercury.co states it has a 10 minute sign-up, which we found to be quite true provided that you have the requisite documents. Our account was approved just a few hours after we signed up, and on-boarding was overall a seamless experience.
One of Mercury.co's main drawbacks is that it has a slightly lower effective yield. There are two causes for this. First, is that you only earn interest on the money in your savings account; your checking account will earn no interest. Second, is that Mercury.co's saving account provides a slightly lower interest rate compared to what you'd expect from a government money market fund. If you maintain over $250k in your checking account, or are invited to Mercury.co's "Tea Room" (read: VIP) program, then you'll get 1.25%. Otherwise, you're stuck with 0.75%. We think that this is a competitive deal only if you are in their "Tea Room," as otherwise the $250k minimum in your 0% interest checking account really limits your potential effective yield, and resigning yourself to 0.75% is also suboptimal. That said, we don't think this is a deal-breaker because you can pretty consistently get into the "Tea Room" program if you just send them a nicely-worded email when you open your account.
Mercury.co has all of the functionality that you would expect from a full-service bank, minus physical checkbooks. Apart from the basic electronic transfers (i.e. ACH and wires, both inbound and outbound), Mercury.co will allow you to send physical checks through their "Send Money" button (some banks may call this service Bill Pay), as well as deposit checks electronically right through their dashboard. They also will send you a debit card (with a nice online administrative dashboard), which you can use to withdraw cash from ATMs. Mercury.co is part of the Moneypass network (the ones you'll find at 7-11s and U.S. Bank branches), so you will get fee-free withdrawals from those locations.
Finally, Mercury.co does charge for sending wires, although receiving wires, inbound + outbound ACH transfers, and checks, are free. This is supposedly the actual cost that their partner banks charge them, which they pass onto you. We would prefer that Mercury.co eat these costs for the sake of customer experience, but that's a small nitpick. In reality, as a startup, you'll likely be receiving wires (e.g. during your fundraise) and not sending them, so the lack of fees on incoming wires should already be sufficient to save you a lot of money compared to your typical inbound-wire-charging banks.
Silicon Valley Bank, known to many as SVB, is billed as the standard bank for Silicon Valley companies. It has particularly good loan facilities that are geared towards startups. Apart from that, however, accessing your SVB account online feels terribly antiquated. SVB will also try to nickel & dime you more than most (they are a business bank, and know that you have money). They do have a cash sweep program, so you do have an opportunity to earn non-negligible yield if you choose to take advantage of that, although they'll try to prevent you from using itRemember — banks don't want you to enroll in a cash sweep program, because treasury yield rates limit their potential upside. They'd much rather use the money to power higher-yield lending services..
Fidelity is a cash management account like Brex Cash that allows you to choose from many money market funds to invest in, and gives you transparent information on yield. However, these choices matter less because you should only be storing your money in a risk-free government money market fund. Perhaps more importantly, Fidelity has a head-banging on-boarding process replete with physical mail, days of turnaround, and lots of slow risk management.
First Republic Bank is a well-regarded bank (it has one of the highest NPS scores of any bank) and does a very good job with basic bank functionality. However, it gives you abysmal savings interest rates compared to what you could be earning. It does have a cash sweep program, but we've heard that trying to enroll takes an extraordinary amount of headache and effort that would've been much better spent on building product.
Although we are loath to generalize, Wells Fargo / Bank of America / Chase / other large consumer banks generally follow the same trend as First Republic, except less customer friendly and with harder-to-use online portals. All have negligible interest rates for their business accounts, attempt to nickel and dime their business customers, and have cash sweep programs that are confusing, hard to enroll in, and provide lower yields than you'd expect from a competitive money market fund (even net management fees).
There are a number of new digital-only, startup-friendly banks popping up (such as Azlo and Monzo) that are known for having good, online-first user experiences. However, these banks lack full-service functionality, and out of every one of these banks that we surveyed, none had competitive interest rates.